Negotiation and Status Quo – When is it best to ‘Rock the Boat’?

Powerful incumbents do best by supporting the status quo. Their big move is to set the agenda and timing of negotiations, and tend to display AVOIDING or COMPETING styles. In the US-China negotiating landscape, the classic supporter of status quo is the Chinese SOE and the entrenched MNC. The State Grid and KFC may not seem to have much in common, but they both feel that things are just fine the way they are – and will work hard to keep the negotiating environment stable. Both parties benefit from rules and practices that raise the barrier of entry.

Newcomers and ambitious but relatively weak counter-parties should favor disruptive strategies. They do best in times of change, shifting tastes & trends, and chaos. Often those coming from a weaker position will start-off as appeasers or even collaborators, but these approaches will put them at a perpetual disadvantage unless they can destroy the competitive equilibrium. This can be achieved by posing as friend or subordinates and then, after they have acquired experience, knowledge and technology, take action to undermine the position of incumbents. Huawei, Wahaha and much of the Chinese auto industry have followed this path with great success. Most Western businesses enter the China market with some sort of disruptive strategy in mind – whether they know it or not.

The problem for Americans in China is that we tend to negotiate as though the status quo favors our business model when it really isn’t. We are all still working off of Jack Welsh’s playbook – always be number 1 or 2 in your industry and don’t waste a lot of time building when its quicker to buy leadership. This strategy leads to problems in China, where the status quo favors local SOEs.

Weak overcomes the Strong

Chinese negotiators are well schooled in tai-chi tactics – and are all too happy to allow brash, confident (and well-financed) western partners and buyers to dominate business relationships until they over-extend their resources and transfer technology, know-how, and best practices. Then the Chinese partner breaks off and goes it alone – usually tweaking the product or business model for maximum impact on the local market. Expat managers, confident that the Chinese market will eventually ‘figure things out’ and start conforming to Western patterns, are often quick to blame and slow to correct their own product or business.

What can expats and international managers do to diagnose the situation and react when the trend is not their friend?

Get better analysis. You can negotiate successfully from a position of strength, and you can negotiate successfully from a position of weakness. What you can’t do is negotiate as though you are stronger when in fact you are weaker. Americans tend to think that they can import market leadership to China. Most of the more spectacular negotiating failures of the past few years (eBay, Tim Geithner) started with the American side assuming that the Chinese side needed the Americans more than the Americans needed the Chinese.

What if your deal is successful? Chinese are simply better at post-deal disruption than their western counter-parts. Quite frankly, it’s getting a little late in the game for this. Western negotiators seem unable to envision a future where the Chinese side is unsatisfied with a minority stake in a successful Chinese business. (Think Danone-Wahaha or China’s absorption of fast-train tech from Japanese and German partners. ) Time after time, the Chinese allow their American partners to believe that NY or LA is still calling the shots when all that is going on is a wholesale transfer of technology and assets. US negotiators try to minimize risk with contracts and clauses, while the Chinese side is concerned with acquiring technology and know-how. 18 months into the relationship, the contract is worthless but the technology has been developed and tweaked into a valuable asset.

Ask, ‘what can go wrong’? There are two ways to pose this question – as an expression of confidence (like market leaders and monopolists) or a hard-hitting risk assessment (like disrupters). Hint – the first thing that can go wrong is that your bulky, detailed contract doesn’t hold water in China. If you can’t envision a scenario where your Chinese partner ends up cleaning your clock in your own home market than you are either not performing a rigorous enough analysis or you are choosing the wrong partner. Americans tend to be incredibly naïve and short-sighted when it comes to scenario analysis in China.

Don’t be afraid of conflict. Western managers have to stop undergoing voluntary de-clawing when they pass through Chinese border control. We hear the Chinese talk about ‘harmony’ and we read about ‘losing face’ and ‘guanxi’, and we convince ourselves that our counter-parties are all pacifist Buddhist monks. This is the road to ruin in China. If you can’t say ‘no’ then you are not negotiating – you are a subordinate. Americans are direct, analytic and assertive. Chinese partners tend to be passive-aggressive, manipulative and – quite frankly – a bit whiney. If your first casual disagreement undermines your business relationship, then you don’t have a viable relationship. If the status quo is in your favor then you can afford to give in on procedural issues – but if you are evenly matched or worse than you have to be a little scrappier. Don’t stomp around like a bully – but you can’t be walking on eggshells all the time.

Go into the light. Americans tend to fritter away their biggest advantages by agreeing to backroom negotiation, confidentiality and secrecy. The ability to be direct and to function in an atmosphere of full disclosure is the American negotiator’s secret superpower. It’s the Chinese who know how to be subtle, secret and sublime. As soon as you start engaging in secrecy, confidentiality and informal agreements, you are playing on someone else’s court. Experienced expats in China usually end up agreeing to far more confidentiality and informal agreements than they would at home, but you shouldn’t make that your starting position. Get concessions and score a deal point or two in exchange for sending the contract lawyers home early.